Financial Openness and National Autonomy: Opportunities and Constraints

Financial Openness and National Autonomy: Opportunities and Constraints

Financial Openness and National Autonomy: Opportunities and Constraints

Financial Openness and National Autonomy: Opportunities and Constraints

Synopsis

The previous decade ushered in a globalization of finance and governments abandoned their "Keynesian" responsibility to engage in international financial management. A new doctrine of global neoclassicism arose, based on the premise that regulation of financial markets was futile. This volume rejects that approach, and asks whether national policy autonomy is still possible. The authors address financial openness from a "political economy" perspective, including both general historical and theoretical approaches, as well as case studies of countries such as Australia, Mexico, and Pakistan.

Excerpt

The breakdown of the Bretton Woods fixed exchange rate regime in 1971 marked a major change in the post-war international monetary and financial system. the conventional wisdom of the time had it that the advent of floating exchange rates would introduce a needed element of automatic and continuous adjustments in external balances of payments. This would, it was argued, avoid the need for periodic changes in exchange rates, which promoted destabilizing speculation, allow market incentives greater freedom to influence the flow of investible funds, and allow national authorities greater latitude in the implementation of domestic monetary and fiscal policies to the extent that they would no longer be constrained by the possible danger to a fixed rate of exchange.

In the event, however, it became clear that these expectations were unfounded. the new regime of floating rates rapidly developed three characteristics which, together, have had a major adverse impact on the smooth growth of the world economy. First, floating rates resulted in a marked increase in the short-term instability of exchange rates, not only of key currencies in world trade--particularly the us dollar and the pound sterling--but also of the currencies of many small countries whose currencies were pegged to the key currencies. Second, far from promoting automatic and continuous adjustment to shifts in the underlying trade and payments positions, the floating of exchange rates has been associated with large and persistent misalignments of currencies, particularly among the currencies of the principal trading countries. Third, floating has resulted in the emergence of new forms of constraint on the autonomy of national economic policy-making, since national policies have now become heavily dependent for their success on favourable changes in the international economy.

A common factor behind these several--and generally adverse--effects of currency floating has been the vast expansion in the volume of speculative funds and other capital flows across national borders over the past decade. the impact of the ebb and flow of these funds on asset markets, both on domestic financial assets and on the foreign exchanges, has been greatly accentuated by the deregulation of financial markets that has taken place during the 1980s. Exchange rates, at least of key currencies, have consequently come to reflect 'market sentiment' and associated uncertainties, which influence speculative transactions, as much as--or even more than--the underlying 'fundamentals' of trade in goods and services. Equally, the persistent misalignment of major currencies has . . .

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